INTERPRETING RECENT RESEARCH ON SCHOOLING IN DEVELOPING COUNTRIES

Policymakers in developing countries have long been troubledby the undesirable, but apparently unavoidable, choice betweenproviding broad access to education and developing high-qualityschools. Recent evidence, however, suggests that this is a badway to think about human capital development. Grade repetitionand high dropout rates lead to a significant waste of resourcesin many school systems. Students in quality schools, however,respond in ways that reduce such inefficiencies, perhaps evensufficiently to recoup immediately investments in quality. Promoting high-quality schools, however, is more difficult thanmany have thought, in part because research demonstrates thatthe traditional approach to providing quality—simply providingmore inputs—is frequently ineffective. Existing inefficienciesare likely to be alleviated only by the introduction of substantiallystronger performance incentives in schools and by more extensiveexperimentation and evaluation of educational programs and schoolorganizations. Incentives, decentralized decisionmaking, andevaluation are alien terms to education, in both industrialand developing countries, but they hold the key to improvementthat has eluded policymakers pursuing traditional practices.      

EVALUATING SOCIAL POLICIES: PRINCIPLES AND U.S. EXPERIENCE

Invariably, studies, proposals, and plans for social programscontain a strong recommendation for evaluation and monitoring.Reliable information about what works and why is clearly vitalfor improving existing programs or designing future ones. Makingsuch assessments requires effective methods of evaluation. Policymakerswho use these evaluations need to know about the methods—the pitfalls to watch for and the relative advantages and disadvantagesof different techniques in different situations. This articledescribes these evaluation methods and the experience accumulatedin the United States in applying them in practice.      

TECHNOLOGICAL CHANGE AND COMMERCIALIZATION IN AGRICULTURE: The Effect on the Poor

Do the economic gains brought by technological innovation andcommercialization in agriculture work their way through to thepoor? The prevailing optimistic view is that they do. But thisview is not universal: some hold that these forces for changecan interact with, or even induce, institutional and marketfailure, with adverse consequences for the poor. Adherents of the pessimistic view point to real-world instancesin which the poor have failed to reap the benefits, or evenhave lost, from the technological change or commercialization.Where these effects have occurred we find that they are mostlyattributable to inelastic demand or adverse institutional features;often, when technology or commercialization has been blamedfor the decline in income of the poor, other—not necessarilyconnected—policies have in fact been responsible for thedamage. This article contends that the optimistic view is, by and large,correct: normally, technology and commercialization stimulateagricultural growth, improve employment opportunities, and expandfood supply—all central to the alleviation of poverty.The evidence does not offer much encouragement to an extensionof this view—that through "social engineering" the benefitsfrom technology and commercialization can easily be targetedtoward the poor; the limited opportunities for such targetingshould of course be seized.      

WHEN DO HETERODOX STABILIZATION PROGRAMS WORK?: Lessons from Experience

What advantages and disadvantages does the heterodox strategyoffer to stabilization programs in countries with chronic highinflation? Heterodox stabilization programs, in our definition,are those that support orthodox policies— that is, tightfiscal policy and a fixed exchange rate—with the initial,temporary use of incomes policies— that is, price andwage controls. This evaluation, based on several heterodox programs,successful and unsuccessful, from the 1960s and 1980s in LatinAmerican countries and Israel, affords four principal lessons: * The rapid reduction in inflation at the beginning of heterodoxprograms (which usually comes about at small cost) is the easypart; the problem is to maintain price stability over time. * Incomes policies in heterodox stabilization programs are justifiedonly in countries with high chronic inflation, where persistentinflation is more pervasive and problematic. * There is a case for a bigger fiscal adjustment in heterodoxthan in orthodox programs because of the risk that a programwith price controls may be misperceived as a populist devicefor achieving price stability without adjusting. * The failure of a heterodox program is more likely to destabilizeinflation than is the failure of an orthodox program.      

INCOMPLETE MARKETS AND COMMODITY-LINKED FINANCE IN DEVELOPING COUNTRIES

This article provides a framework for appraising new financialinstruments and evaluating the extent to which they can helpalleviate problems of incomplete credit markets and contingentclaims markets in developing countries. Although the issuesinvolved apply to any new financial instrument, we give particularattention to commodity-linked securities because many developingcountries specialize in producing a handful of primary commoditiesand are therefore exposed to substantial commodity price risks.The article looks at the supply of, demand for, and pricingof commodity-linked securities and discusses some issues thataffect their use by developing countries: their special legalstatus as sovereign debt; their feasibility (since to becometruly effective they will require liquid secondary markets);and the construction of an optimal portfolio of external debtobligations. It also discusses the potential for new financialinstruments—particularly commodity-linked securities—asa tool for risk management in developing countries.      

HOW WELL CAN METHOD SUBSTITUTE FOR DATA? FIVE EXPERIMENTS IN POVERTY ANALYSIS

No one doubts that good data are essential to sound policymaking.Alas, data are invariably faulty. Methodological solutions todata inadequacies have often been proposed and implemented,but they have been tested only rarely. Yet the methods thatare used may well determine the direction of policy. For example,the particular survey method used—and the way nonsurveydata are interpreted—may be critical in assessing whethera country's strategy for reducing poverty is working. This articleshows how counterfactual experiments can help test the reliabilityof various methods of dealing with common data problems. Well–designedmethods—and they need not be very complicated—canhelp get around the problem, although it appears that substitutingmethod for data is a long way from being perfect.      

Evaluating the Impact of Conditional Cash Transfer Programs

Several developing economies have recently introduced conditionalcash transfer programs, which provide money to poor familiescontingent on certain behavior, usually investments in humancapital, such as sending children to school or bringing themto health centers. The approach is both an alternative to moretraditional social assistance programs and a demand-side complementto the supply of health and education services. Unlike mostdevelopment initiatives, conditional cash transfer programshave been subject to rigorous evaluations of their effectivenessusing experimental or quasi-experimental methods. Evaluationresults for programs launched in Colombia, Honduras, Jamaica,Mexico, Nicaragua, and Turkey reveal successes in addressingmany of the failures in delivering social assistance, such asweak poverty targeting, disincentive effects, and limited welfareimpacts. There is clear evidence of success from the first generationof programs in Colombia, Mexico, and Nicaragua in increasingenrollment rates, improving preventive health care, and raisinghousehold consumption. Many questions remain unanswered, however,including the potential of conditional cash transfer programsto function well under different conditions, to address a broaderrange of challenges among poor and vulnerable populations, andto prevent the intergenerational transmission of poverty.      

INFLATION AND THE COSTS OF STABILIZATION: Historical and Recent Experiences and Policy Lessons

This article reviews various experiences with stabilization.It first examines stabilization programs in the context of hyperinflation—lookingat the experiences of Austria and Germany in the early 1920sand Bolivia in 1985—and then reviews and interprets theresults of orthodox stabilization plans (applied in Argentina,Chile, and Uruguay during the mid-1970s and early 1980s) andthose of heterodox programs (the austral plan in Argentina andthe cruzado plan in Brazil, with a glance at the Mexican andIsraeli experiences). The paper concludes with a discussionof conceptual issues and implications for the design of stabilizationpolicies.      

FINANCING INFRASTRUCTURE IN DEVELOPING COUNTRIES: LESSONS FROM THE RAILWAY AGE

In recent years suggestions for reforming the provision andfinancing of infrastructure services in developing countrieshave focused on private participation. This alternative to publicfinancing is seen as a way both to minimize the inefficienciesof public administration and to avoid the need for externalborrowing. In fact, for much of the nineteenth century, infrastructureprojects were privately financed and built. This approach, however,did not obviate the need for government intervention and foreigncapital. Because of the difficulties of assessing projects,investors were reluctant to commit their funds, and governmentsturned to subsidies and loan guarantees to encourage investment.Often, however, government intervention only replaced one setof problems with another. Investors with government-guaranteedloans had no incentive to monitor the firm's performance—alimitation that led to the diversion of funds and frustratedthe public interest. This article draws out the implicationsof this experience for policymakers in developing countriestoday.      

CASH FLOW OR INCOME?: The Choice of Base for Company Taxation

Cash flow and equity income (or income) are two alternativebases advocated for taxes on businesses throughout the world.Although in practice most tax systems are hybrids with elementsof both types of taxes, recent literature has stressed the meritsof the cash flow tax because it is simple in concept and itdoes not distort decisions about capital expenditures and financing.But international issues and administrative complexities—particularlytax evasion—present problems that must be sorted out beforea cash flow tax can be implemented.      

REFORMING FINANCE IN TRANSITIONAL SOCIALIST ECONOMIES

Financial reforms initiated in most transitional socialist economiesdo not yet adequately provide many of the financial servicesassociated with market-oriented financial systems. Such services—mobilizingresources, selecting firms and allocating capital, monitoringfirm managers, and facilitating the management of transactionsand risk—are a necessary condition for economic reformto improve living standards. This article envisages four central strategies to guide reformof the financial sector: • Building an infrastructure based on clear and enforceableproperty rights, modern accounting and auditing standards, reliablepayments systems, sound prudential and enforcement regulations,and professionals trained in finance • Ending the shell game of trying to hide the losses ofstate-owned enterprises, and separating government decisionsto finance "priority" firms from the allocation decisions ofindependent financial institutions • Privatizing some financial institutions early—althoughnot necessarily precipitously—in concert with the privatizationof firms and supervisory capabilities, meanwhile cleaning upbank loans to maximize the chances that firms and banks willsucceed as private entities • Improving the tax system and stressing a prudent interestrate policy to reduce uncertainty, distortions, and excessiverepression of the financial sector.      

ORGANIZED LABOR, POLITICS, AND LABOR MARKET FLEXIBILITY IN DEVELOPING COUNTRIES

Organized labor is usually viewed as an obstacle to labor marketadjustment. But unions' responses to adjustment programs infact range from militant opposition to acquiescence or evenexplicit cooperation. Three sets of variables shape these responses:the strength and characteristics of the union movement itself;economic cycles; and political institutions and their ties tounions. •Strength of the labor movement: In industrial democracies,an aggressive stance on wages tends to be associated with moderatelystrong unions. Small or weak unions are less militant, as mightbe expected; more surprisingly, large and powerful unions alsotend to be more moderate, primarily because of their greaterparticipation in consultation and decisionmaking at the nationallevel. The experience in developing countries is somewhat different:only a few of these have strong labor movements, and among these,militancy is common. The large share of wage labor in the publicsector complicates comparisons with industrial nations, sincegovernments as employers clearly behave differently from privateemployers, particularly in hard times. •Economic cycles: Depression almost invariably reducesmilitancy in developing as well as industrial nations. •Political institutions: The nature of the political regime—democraticor authoritarian—is only roughly associated with how governmentshandle labor relations, and correspondingly with the optionsavailable to unions. More important in shaping unions' behaviorare the nature of the political party system and how unionsare connected with parties. The conditions needed to gain workers'cooperation are analogous to those which encourage businessto invest: political stability, a voice in policy that affectstheir interests, and arising from these, the confidence thatcurrent sacrifices will ultimately yield a fair share of futurebenefits.      

ALTERNATIVE FORMS OF EXTERNAL FINANCE: A SURVEY

For many developing countries, alternative forms of externalfinance—all forms of finance that are not guaranteed byor mediated through the public sector—have become increasinglyimportant as traditional financing to the public sector hasebbed. Yet a survey of the literature reveals few recent analyticalinsights about alternative financing, which includes foreigndirect investment, project lending, portfolio investment, closed-endequity funds, private nonguaranteed debt, licensing, joint ventures,quasi-equity contracts, and other forms of private, nonrecourselending to private borrowers. The literature offers little solidguidance for distinguishing between alternative and traditionalfinancing with respect to country risk, for establishing themost appropriate and efficient incentive structures and restrictionsin the host country, or for identifying the optimal financingmodes for international firms investing in developing countries.This gap in the analytical literature has important implicationsfor policy formulation. It is not always clear whether a countryis developing incentives and establishing safeguards (for ensuringadherence to project performance requirements) that are mosteffective in attracting alternative forms of finance.      

STUDENT LOANS: AN EFFECTIVE INSTRUMENT FOR COST RECOVERY IN HIGHER EDUCATION?

Governments and universities have trouble reconciling the goalof keeping higher education widely accessible with the needto retrieve some of its costs from students. Student loans offera plausible solution to the problem. But loan programs turnout in practice to have been a disappointing instrument of costrecovery: analysis of twenty-three programs found that studentsrepay only a small portion of the value of the original loan.Subsidies, high default rates, and high administrative costshave eroded the value of repayments. Sometimes loan programshave proved as expensive as outright grants. This article argues that most loan programs could be reformedto improve financial effectiveness—through targeting,charging positive real interest rates, designing repayment plansto take account of the likely pattern of graduate earnings,and ensuring that the oversight institutions can and will collect.Or governments could explore alternative devices for cost recovery,such as a graduate tax. This approach levies a higher incometax rate on beneficiaries of government-subsidized higher educationand thus preserves the idea, implicit in loan programs, of payingfor education with future earnings. As part of an effectivetax system, a graduate tax could bring in significantly morerevenue than traditional loan programs.      

Formal and Informal Markets for Water: Institutions, Performance, and Constraints

Water markets—either formal or informal—can be anefficient method for reallocating scarce water supplies. Atthe same time certain constraints can raise the transactioncosts of trading water. This paper reviews the conditions necessaryto establish successful water markets, identifies potentialproblems, and offers mitigating strategies. It also uses examplesof several informal and formal water markets already in operationto illustrate these problems and the solutions to them.      

EDUCATION VOUCHERS IN PRINCIPLE AND PRACTICE: A SURVEY

An education voucher system exists when governments make paymentsto families that enable their children to enter public or privateschools of their choice. The tax-funded payments can be madedirectly to parents or indirectly to the selected schools; theirpurpose is to increase parental choice, to promote school competition,and to allow low-income families access to private schools.Some opponents predict that vouchers will destroy the publicsystem, aggravate poverty, and foster segregation. Others fearthat voucher-receiving independent schools will be regulatedout of recognition. The main purpose of this article is to examine the recent emergenceof voucher systems as an interesting phenomenon in its own right.The evidence summarized relates to voucher systems operatingin twenty countries, provinces, and states. The typical "funds-follow-the-child"voucher system, in which governments subsidize "schools of choice"in strict proportion to enrollment, appears to be the favoriteform. This type of voucher has been adopted by developing countries—notablyBangladesh, Belize, Chile, Colombia, Guatemala, and Lesotho—aswell as by industrial countries such as Poland, Sweden, theUnited Kingdom, and the United States. Much of the recordedexperience with such programs is pertinent to the longstandingtheoretical debates on the desirability of voucher systems.      

Choosing a System of Unemployment Income Support: Guidelines for Developing and Transition Countries

Mounting evidence suggests that excessive job protection reducesemployment and labor market flows, hinders technological innovations,pushes workers into the informal sector, and hurts vulnerablegroups by depriving them of job opportunities. Flexible labormarkets stimulate job creation, investment, and growth, butthey create job insecurity and displace some workers. How canthe costs of such insecurity and displacements be minimizedwhile ensuring that the labor market remains flexible? Eachof the main unemployment income support systems (unemploymentinsurance, unemployment assistance, unemployment insurance savingsaccounts, severance pay, and public works) has strengths andweaknesses. Country-specific conditions—chief among themlabor market and other institutions, the capacity to administereach type of system, and the size of the informal sector—determinewhich system is best suited to developing and transition countries.      

Counting the World's Poor: Problems and Possible Solutions

As recent discussions have made clear, the apparent lack ofpoverty reduction in the face of historically high rates ofeconomic growth—both in the world as a whole and in specificcountries (most notably India)—provides fuel for the argumentthat economic growth does little to reduce poverty. How confidentcan we be that the data actually support these inferences? Atthe international level, the regular revision of purchasingpower parity exchange rates plays havoc with the poverty estimates,changing them in ways that have little or nothing to do withthe actual experience of the poor. At the domestic level, theproblems in measuring poverty are important not only for theworld count but also for tracking income poverty within individualcountries. Yet, in many countries, there are large and growingdiscrepancies between the survey data—the source of povertycounts—and the national accounts—the source of themeasure of economic growth. Thus economic growth, as measured,has at best a weak relationship with poverty, as measured.